ADINOLFI, FREDERICK, MAHER IBRAHIM, FRED GRAY, and ANDREW RADFORD, U.S. Department of the Interior, Minerals Management Service, Herndon, VA

ABSTRACT: Environmental and Regulatory Costs in Oil and Gas Resource Evaluation

Fair-market value of tracts offered for lease on the outer continental shelf is determined by competitive bidding. When the Minerals Management Service (MMS) determines that competition is insufficient, it evaluates a tract's value before accepting a bid. Development delays and costs associated with environmental and other government requirements affect economic resource estimates.

The petroleum industry, aware of environmental needs, has aimed exploration at large, natural gas prospects. Also, MMS focuses leasing on areas where development would have the least impact on the environment.

Three prospects in the Mid-Atlantic Planning Area that differ greatly in size and water depth were selected to illustrate how costs and delays affect resource estimates. A discounted cash-flow model, which incorporates the statistical principles of multiple trials, random sampling, range of values, and marginal probability, attempts to simulate the offshore exploration and development process. However, the model is just a model; it only simulates the predictable. Sensitivity analysis of the cash-flow model to cost and delay variables provides information on a prospect's resources and present worth.Lead time before development affects development and operating costs, especially in deep water. These costs affect estimates of economic field life and potential reserves. In assessing oil a d gas resources, one must consider environmental and regulatory costs and the possibility of long delays in offshore development. This study describes how to predict these costs and their effect on resource estimates.

AAPG Search and Discovery Article #90995©1993 AAPG Eastern Section Meeting, Williamsburg, Virginia, September 19-21, 1993.